Business News - DSL Wholesalers Reinventing Themselves

Posted: 04/2001

DSL Wholesalers Reinventing Themselves
By Becky Bracken

Faced with unfavorable market conditions, fierce competition from incumbents and an ever-shrinking pool of ISP distribution channels, DSL wholesalers are going through an inevitable period of reinvention. But in an industry where demand is high and continues to grow, smart data LECs (DLECs) that can seize market opportunities and remain fiscally conservative can remain viable contenders in the long term, analysts say.

ISPs, once the bread and butter of wholesale DSL providers, have faltered--particularly independent consumer-oriented ISPs--leaving DSL providers NorthPoint Communications Group Inc. (www.nortpoint.net), Covad Communications Co. (www.covad.com) and Rhythms Net Connections Inc. (www.rhythms.com) in search of alternate means to sell and distribute service. While strong publicly traded ISPs such as EarthLink Network Inc. (www.earthlink.com) and carrier-affiliated ISPs like WorldCom Inc.'s (www.wcom.com) UUNet Technologies Inc. (www.uu.net) are likely to remain strong partners with DSL wholesalers, they can no longer be the only means of distribution. As a result, DLECs are pursuing direct sales, co-branding agreements and other channels, but with wide variations in strategies.

"Covad and NorthPoint launched with pure wholesale and their logic was to build the entire network and then rely on downstream ISPs to sell the service," says Matthew Rubins, a principal with M/C Venture Partners (www.mcventurepartners.com). "They made the bet that they could serve as a single point of contact with multiple carriers and leverage a lot of downstream distribution channels, and I think they realized, as we did, that ISPs are pretty bad at selling high-speed services."

NorthPoint, which recently filed for Chapter 11 bankruptcy protection, maintains that its operations are stronger than ever, aside from well-publicized ongoing financial and legal troubles. NorthPoint's initial plans moving forward are on hold until a buyer can be found for the company. Shellye Archambeau, chief marketing officer for NorthPoint, says that the company has several potential buyers and plans to have a course of action for NorthPoint cemented by the end of the first quarter.

"Our primary objective is to find a strategic partner to come and buy us," Archambeau says. "It's difficult to discuss what our ultimate strategy will be moving forward, because that will depend on who the ultimate buyer is."

NorthPoint, despite being in the financial doldrums, has had some success with its partnership with Microsoft Corp.'s (www.microsoft.com) MSN and RadioShack Corp. (www.radioshack.com). NorthPoint's DSL service can be ordered as one of several Internet access options at MSN kiosks in Radio Shack stores across the country. Archambeau says that with NorthPoint's electronic bond with MSN, service is being delivered to customers within two weeks of the order being placed.

Rhythms has always had diverse distribution channels, which has included an in-house sales staff. In the past, Rhythms' sales staff sold directly to Fortune 500 companies, which is now left to carrier partners like WorldCom, Qwest Communications International Inc. (www.qwest.com) and AT&T Corp. (www.att.com).

Eric Rasmussen, senior analyst with TeleChoice Inc. (www.telechoice.com), says that early on, Rhythms faced some difficulty in acquiring ISP partnerships because their direct sales model was often in direct competition with ISPs.

"But it turns out Rhythms had the most foresight," Rasmussen adds.

Rhythms also has partnerships with broadband integrator FIRETAP Communications Inc. (www.firetap.com), a division of Homestore.com Inc. (www.homestore.com).

In addition to seeking out new channel partners, Rhythms has announced that, in an effort to conserve cash, it will suspend service in 20 smaller markets this year, leaving room for the company to focus on the larger top 40 markets.

Covad is pursuing a slightly different route. Aside from a similarly pared down ISP channel, the company has two other major target markets--small businesses and large companies interested in providing branded broadband access to customers.

Covad's Integrated Services unit allows partners like Sony Corp. (www.sony.com) and Avon Products Inc. (www.avon.com) to provide partners and customers with branded broadband access. The Covad Business Solutions unit targets small businesses.

Through the acquisition of Bluestar.net, Covad has approximately 10,000 business lines already installed. Moving forward, Abhi Ingle, vice president of product development and marketing for Covad, says that the small to medium-sized enterprise (SME) market offers the greatest revenue potential because of the number of value-added services that can be bundled with broadband service, and because prices have not yet been driven down below the point of making a profit, unlike what has happened in the residential sector.

In fact, Ingle points to SBC Communication Inc.'s (www.sbc.com) raising of rates in February by $10 to $49.95 as a sign that prices will have to come up across the sector in order to provide better customer service and experience.

"What other market do you know of that when demand outstrips supply you lower prices?" Ingle asks. "What I think is going to happen is some rationality is going to return to the marketplace. I think the result will be slightly slower growth than before, but it's going to improve customer experience, which is something that has really lacked in the past year or so."

The RBOCs, which have been faulted for rock-bottom pricing of DSL services in the residential sector, haven't presented compelling offerings to small businesses, which opens huge opportunities to DLECs like Covad.

"The small business segment is a much different situation," Ingle says. "The choice has been much narrower in the small business segment, because if you look at what's happened, the RBOCs ... have focused almost exclusively on the consumer side, because they're in competition with cable."

Across the board, DSL wholesalers still realize the importance of strong ISP partnerships, but also have realized it cannot be the only means of distribution moving forward. "The gold rush days of building a network as fast as you can and not caring whether they make a profit--those days are gone," Rasmussen says.